Insider details on Benitago's bankruptcy (from the Best@Amazon newsletter)

 · 3 min read

Me: "chatGPT, please give us an image that describes what happens to a brand when its acquired by an aggregator."

chatGPT: "Here is an image that suggests pointless complexity, featuring a whimsical and intricate Rube Goldberg machine." complexity The aggregation business is based on a simple premise: you can buy profitable brands and scale them up through capital and expertise. The capital is self-explanatory: you have more cash to invest in the brand. ...or do you? Remember a normal multiple was 4 - 6x EBITDA (it went irrationally higher than that during the go-go months) so the brands acquired are loaded up with debt from day one. E.g., Benitago had debts of $50-$100M on assets of $50-$100M (that is not a typo), which is the norm because of that 4-6 multiple they were paying combined with the probability the financial and operational performance of the brands reduced as soon as the sale was completed. An upside 'U' was the common pattern you'd see for a brand's performance post acquisition: an initial rise post-purchase, a gradual decline to flatness, and a loss of momentum leading to downward performance. Why did this happen? That's the second part that caught our eye in Jon's newsletter.

The second part of the aggregator premise is expertise. Benitago had 80 contractors and only 12 employees. With so much debt, you need to save money somewhere and that somewhere is in labor costs. Now some aggregators do have more employees than contractors, e.g., at least one had >150 employees during the go-go twelve months that was mid-2021 to mid-2022, but inevitably aggregators are driven to reduce their labor costs to service the massive debt they take on when buying a brand.

So, many aggregators end up hiring contractors in cheap 3rd world countries like the Philippines (average salary is $330/mo), Venezuela (average salary is $150/mo), Pakistan and so on. These contractors are not going to be experts in managing, operating or scaling a brand... nor in technology, which would be the smart way an aggregator can cut costs and improve performance. Replacing the brand's founder, who developed deep expertise over multiple years, with cheap labor from 3rd world countries is not going to bring professional expertise to the brand. The very premise of the aggregation business is flawed: The debt load robs the brand of both capital for investment and expertise for operation. This is what happened to Benitago.

If replacing the founders with cheap labor isn't the right answer. What is? Technology. But not the type of technology that now exists in the e-commerce ecosystem because that technology is balkanized horizontally and vertically, and focused on vomiting information at the brand operator. More data is not better. More applications to learn, connect together and struggle through isn't the answer. The entire ecosystem for e-commerce technology needs to be reconsidered. Something new needs to exist. But do not worry... we are working on just that.

The other point that caught our eye was that Benitago had 29 legal entities. This level of legal complexity is par for the course in the aggregator industry. The reason such a young company like Benitago would have so many legal entities is that every purchase of a brand was (likely) handled through its own shell corporation. There are many reasons for this but it inevitably increases complexity for the entire enterprise and causes headaches for the acquired brands as well because the legal balkanization suggests that operational and financial balkanization exists as well. That is, the brands are acquired and little investment is made (remember your capital is swallowed up in debt) in fusing all the brands into a single organization that you can truly operate and scale as a whole. In other words, tiny Benitago was more like an (inefficient) conglomerate than a true, unified business operating brands at scale.

The out for all these problems for a company like Benitago was technology. Not buying a dozen different tiny tools from a dozen different vendors, but a single platform that enabled them to operate brands at scale. Everywhere. All the time. For all time. That is our vision. symphonie is still in stealth but reach out if you want to learn more.